Does Public Scrutiny on Corporate Tax Decisions Affect Directors? Effects of Responsible (Irresponsible) Corporate Tax Practices on Director Reputation

Abstract

In 2004, the Citizens of Tax Justice (CTJ) released a report that significantly raised public awareness of corporate tax avoidance practices in the companies that it scrutinized in the study. Using a six-year period straddling the CTJ event, we compare over time changes in external board seats held by incumbent directors serving scrutinized firms against those of their counterparts serving control firms with comparable tax practices but that were not scrutinized in the CTJ study. Incumbent directors in scrutinized firms with minimal tax avoidance practices gained more external board seats after the CTJ event than did board members in control firms. However, directors in scrutinized firms with aggressive tax avoidance practices neither gained nor lost more external board seats after the CTJ event than did directors in control firms. These findings provide little evidence that constituents in the corporate sector overwhelmingly favor tax minimization practices as acceptable practices of conducting business operations. Rather, they provide evidence that corporate constituents, like their social peers, are somewhat attuned to the expectation for socially responsible tax practices.

Keywords: Corporate tax avoidance; news media coverage; director reputation; corporate social responsibility; social norm; labor market for directors

JEL Classification: H26; J10; L14; M41